Remarks of Under Secretary Eric L. Hirschhorn at the Export Control Reform Workshop, Colorado Springs, CO

Remarks ofEric L. HirschhornUnder Secretary for Industry and SecurityUnited States Department of Commerce

Export Control Reform WorkshopColorado Springs, ColoradoMay 19, 2014

Thank you for the opportunity to speak to the Export Control Workshop. I also would like to thank Patricia Cooper of the Satellite Industry Association and our Conference hosts, the Space Symposium, for organizing this event.

My appearance here today coincides with last Tuesday’s publication of the new Commerce and State Department rules that transfer certain satellites and related items from the U.S. Munitions List (USML) to the Commerce Control List (CCL).

I would like to express my appreciation to the members of the satellite industry for the cooperation and support you have provided Commerce and the other agencies in getting these rules right. We value your comments and our dialogue about Export Control Reform (ECR) has resulted in the development of sound public policy that enhances U.S. national security.

Export Control Reform (ECR) Generally

Today, I will discuss the ECR changes, including the satellite rules, we have completed over the past year as well as some of ECR’s national security and economic benefits for the U.S. Government and industry. I will then provide an update on where we stand today, discuss what we can do to ensure the successful implementation of the satellite rule, and say a few words about my bureau’s U.S. Space Industry "Deep Dive" report, which involves many segments of your industry.

Our national security requires reform of the export control system. We need to: (1) improve our interoperability with close friends and allies; (2) strengthen the U.S. defense industrial base by reducing incentives to "design out" controlled U.S.-origin parts; and (3) focus our limited resources on the threats that matter most. In addition to achieving these national security objectives, ECR will ease the licensing burden on U.S. exporters.

Implementing these objectives requires significant regulatory change. We have strived to make the reform process clear, predictable, and reliable because the control system we’re leaving behind is confusing, overly complex, and tries to protect too much.

A central part of the reform initiative is the Defense Department-led effort, in which State, Commerce, and other departments and agencies have participated, to identify those defense articles on the State Department’s United States Munitions List (USML) that continue to warrant the strict, one-size-fits-all controls of the International Traffic in Arms Regulations (ITAR). This has involved working closely with the military services to ensure that only those defense articles critical to maintaining a military or intelligence advantage remain on the USML.

The review process has resulted in the removal, as far as we could, of the basket categories that until now have accounted for about half of the 85,000 licenses issued annually by the Department of State. Military items that do not warrant continued control on the USML are becoming subject to the Export Administration Regulations (EAR) and the new "600 series" controls on the Commerce Control List (CCL). Because the satellite items that are being transferred are not military in character, they will go into the new 9x515 ECCNs—that is, a "500 series"—on the CCL rather than the "600 series."

This is not a decontrol, but Commerce’s regulations allow for country-based exceptions as well as distinctions based on the technical specifications of an item. Thus, the U.S. government can "right-size" controls on less sensitive military items, such as a bolt for an F-16, that are destined for our country’s allies and other multilateral control regime partners.

Status of ECR Activities

We are translating the ideas of making the USML into a positive list, establishing License Exception Strategic Trade Authorization (STA), and affecting other reforms into final regulations.

On April 16, 2013, Commerce and State published final rules revising the controls on aircraft and gas turbine engines, particularly parts and components. These rules took effect October 15, 2013 and BIS's Munitions Control Division has been processing numerous license applications to transfer these "600 series" items to allies and friends.

The April 16 rules included a number of new and revised regulatory definitions that advance the process of harmonizing the EAR and the ITAR. The new definition of "specially designed" offers increased clarity and predictability for exporters without over-controlling or under-controlling items.

The April 16 transition rule also describes how items previously controlled by the ITAR are dealt with under the EAR. The rule addresses: (1) new license periods (which for Commerce is now four years instead of two); (2) the applicability of ITAR license exemptions not previously in the EAR; (3) grandfathering periods and arrangements for current licenses; and (4) existing State Department licenses and agreements.

At the request of industry, most of the new regulations will include a 180-day delay in the effective date to allow exporters to adjust their business processes and compliance programs.

Since April, Commerce and State have published final rules covering ten additional categories of the CCL and the USML. On July 8th, Commerce and State published four categories—military vehicles, vessels of war, submersible vessels, and auxiliary and miscellaneous items. These rules became effective on January 6, 2014.

On January 2, we published the next five categories to go final – energetic materials, personal protective equipment, military training equipment, launch vehicles, and nuclear items. These rules will become effective on July 1st.

Satellites

In January 2013, President Obama signed the National Defense Authorization Act for 2013, which restored his authority to determine the appropriate export controls for satellites and related items. We owe special thanks to Senator Bennet of Colorado and Congressman Smith of Washington for their efforts to make this possible.

On May 13, 2014, Commerce and State published interim final rules on satellites. The Commerce Satellite Rule creates four export control classification numbers (9A515, 9B515, 9D515 and 9E515) to control the licensing of satellites and related items transferred to the CCL. Items transferred include: (1) certain commercial communication satellites and lower performing remote sensing satellites; (2) ground control systems and training simulators "specially designed" for telemetry, tracking and control of spacecraft controlled in 9A515; (3) radiation hardened microelectronics formerly controlled in Category XV of the ITAR; and (4) parts and components of satellite bus and payloads not listed on the USML.

Under the Commerce rule, the presence of an ITAR payload on a CCL satellite or spacecraft will not make the entire satellite an ITAR item unless that ITAR payload provides military or intelligence capability controlled under Category XV of the ITAR.

The Satellite Rules achieve two ECR objectives with respect to radiation hardened integrated circuits (RHCs): (1) eliminating numerous and time consuming commodity jurisdiction exercises to determine which agency licenses microcircuits used in satellites; and (2) finding an alternative to the existing ITAR control structure for RHCs. These circuits were formerly controlled in Category XV of the ITAR, but now are controlled in new Commerce categories 9A515.d or .e. This is significant because it avoids bringing mass-market civilian chips under ITAR control – a development that could bring major disruption to the commercial market. Based on comments received, the Bureau agreed to accelerate implementation of the transition of RHCs from the USML. We set the date of implementation for the RHCs at 45 days (June 27) because manufacturers fear that the next generation of purely commercial circuits may meet or exceed certain parameters in Category XV of the USML. The effective date of implementation for the rest of the rule is 180 days after the date of publication in the Federal Register (Nov. 10).

The creation of the new 9x515 ECCNs will provide a number of benefits, including:

access to worldwide markets except for countries subject to an arms embargo or terrorist controls;

availability of 25% de minimis treatment to non-embargoed destinations;

eligibility for License Exception STA, except for certain software, technology, and hardware; and

There is broad eligibility of satellite items for STA, with the exception of one activity in 9A515 and several items in 9D515 and 9E515 that control software and technology for failure analysis and anomaly resolution. Because the 9x515 ECCN items are commercial in nature, they are not for ultimate end use by a government as is the case with the "600 series" items. Accordingly, they are subject to the STA compliance procedures for commercial items rather than the expanded requirements for the "600 series" military items – notably, they need not be for government end use.

The Departments of Commerce and State have published these rules in interim final form because we recognize that additional analysis and industry input is warranted to establish the control threshold for various items, particularly aperture size for civil and commercial remote sensing satellites and civil vehicles involving the human space flight experience.

These rules enhance national security and will help you to increase sales, but there are no free lunches. We are serious about compliance and enforcement.

Export control reform, including the satellite rules, strengthens our national security. It also helps you—our manufacturing and exporting community—by making it easier to market to our closest friends and allies, and by easing your licensing burdens. It does not reduce your compliance responsibilities. If anything, ECR increases them.

Let me explain. A more nuanced system means a more complex system, and the "price" of removing some license requirements is greater reliance upon exporters to see to compliance. Moreover, we at BIS are few in number, so we must rely on industry as the front line in educating all tiers of the supplier base. Thus, ECR will help your business but you almost certainly will need to dedicate additional resources to the important task of compliance. The success of export controls in general, and this effort in particular, depends on the effort and resources you devote to compliance and enforcement.

BIS will work with you and provide training materials, conduct webinars, and undertake related activities, including the possibility of conducting joint outreach to your foreign purchasers.

However, your superior knowledge of market, customers, and technologies makes it imperative that you play an important role in educating the supplier base.

U.S. Space Industry "Deep Dive"

In addition to ECR, one of BIS’s key security objectives is maintaining the strength of the U.S. defense industrial base.

BIS’s Office of Technology Evaluation (OTE) recently completed an assessment of the intricate supply chain network supporting the development and manufacturing of products and services in the defense, intelligence, civil, and commercial space sectors.

We received nearly 3800 responses, including approximately 62% from small businesses. Based on the proposed version of the regulations, OTE identified approximately 155 product/service areas in the survey that may have items moving to the CCL under ECR.

Approximately half (1941) the respondents have business in one of the 155 product/service areas. Significantly, a large number of the respondents, including many small businesses, do not currently utilize the U.S. export control system for space-related products/services. The results of the survey suggest that it is in your interest to have an educated and responsible supplier base to avoid problems that could diminish the benefits of ECR.

Last July, in response to the many excellent comments the public provided, we published a second proposed version of Category XI (military electronics). The electronics rule is a good example of how much we value your comments and how this dialogue with industry improves the focus and quality of our controls. The electronics rules are now in the congressional notification process and we expect to publish them this summer.

The publication of the first five sets of final rules and the proposed rules on electronics represent important milestones for ECR. We have made significant progress but much work remains to be done.

The Departments of Commerce, State and Defense are reviewing two of the more difficult categories – Category XII, which will include global positioning, sensors and night vision items, and Category XIV, which includes biological toxins and related items.

We have an ambitious plan over the next year to continue with our proposed rules, congressional notifications, and final rules. We still need to publish the few remaining categories in proposed form, work through public comments, notify Congress of each category change, and make the changes in the revised USML and 600-series ECCNs together with other necessary edits to the ITAR and EAR.

Compliance and Enforcement

The enhancement of export compliance and enforcement capabilities of BIS is a critical part of ECR. BIS’s Office of Export Enforcement has evolved into a sophisticated law enforcement agency, with criminal investigators and enforcement analysts collaborating with our licensing officers to identify and redress violations.

BIS’s enhancement of compliance and enforcement includes the Information Triage Unit (ITU), the Export Enforcement Coordination Center (E2C2), and expanded interagency cooperation on end use checks.

The ITU compiles, coordinates, and reports intelligence and other information on foreign parties, thus providing additional information to facilitate the review of license applications. The enforcement coordination center facilitates interagency dialogue and the sharing of relevant information to increase interagency export enforcement coordination.

BIS and State are strengthening the end use check program by coordinating checks where USML and CCL items are co-located. Combining our efforts allows the two organizations to expand the total number of end use checks while minimizing burdens on your foreign customers from multiple checks.

BIS is employing a layered approach to verifying compliance with License Exception STA. We are reviewing data reported in AES to track STA shipments and identify users of STA. Exporters and consignees must provide, upon request, copies of their export activity pertaining to STA. To date, compliance with the provisions of STA is approaching 90 percent.

It is worth noting—as I have in the past—that in our enforcement, we are trying to make a distinction between "oops" and "the heck with you." That is, we are focusing on truly bad actors, not those who have a decent compliance program, make a mistake, and work with us to remedy the situation.

The Transition Process

BIS recognizes that the transition from the USML to the CCL requires considerable work in the short term as you, the exporting community, modify your internal business processes and compliance programs.

We’re implementing a number of activities and tools to assist you, and have deployed on the BIS website two interactive tools to assist exporters in understanding and complying with the new rules: the Commerce Control List Order of Review Decision Tool and the "Specially Designed" Decision Tool.

The "Specially Designed" tool helps you determine whether an item is "specially designed" through a series of "yes" or "no" questions. The "CCL Order of Review" provides the exporter with support in determining whether an item is classified as a "600 series" military ECCN, a non-"600 series" ECCN, or EAR99. Further, the on-line STA interactive tool is being updated to assist companies in determining whether they are eligible for and compliant with STA for "600 series" items.

Since joining BIS, I have stressed the need for outreach, particularly to small and medium-sized companies. This is important because we owe a level playing field to those who comply. It’s unfair, to say the least, for Company A to mount a full-scale, effective compliance program while Company B, its competitor down the street, is blissfully ignorant of the rules and busy making sales that place our national security at risk.

We have and will continue to develop partnerships with non-profit educational groups representing defense exporters. Notwithstanding fiscal austerity, BIS conducted more than 200 ECR-related activities during FY 2013, including weekly teleconferences conducted by Assistant Secretary Kevin Wolf that offer a venue for questions on how the new system works.

We have conducted a number of ECR webinars that have been recorded and made available without charge on the BIS website.

Next Steps

Much of our focus thus far has been on the USML, but we plan to pay a good deal of attention to the CCL and EAR over the next year or two. We published the final CCL "clean-up" rule, which makes the CCL more user-friendly for exporters, on October 4 of last year.

A substantive review of the CCL, beginning with the strategic rationale for specific controls, has not been attempted since 1991. This is a major task – one that will require work with multilateral export control regimes that are capable of handling only a limited number of changes each year. Similarly, the EAR have not undergone a comprehensive review since 1996 and are in need of updating, clarification, and streamlining.

Moving beyond the CCL and the EAR reviews, we would like to revise and simplify encryption controls, which were last revised in 2010.

We recently published a proposed rule seeking comments on proposed changes to support documents required to be submitted for license applications under the EAR and changes in the Bureau’s role in issuing documents for the Import Certificate and Verification system. Comments are due June 9. Please let us hear from you. We also are preparing to seek public comment on how to revise and update our recordkeeping requirements.

Impact of ECR on the Trade Community

One way to view the impact of ECR on your activities is to consider the countries of the world as falling into three groups.

First, if you export defense parts and components or satellite items to U.S. allies and friends, the movement of items from the USML to the CCL will allow you to ship these items via license exception or the more flexible licensing mechanisms of the CCL. This will increase the efficiency, timeliness and security of the supply chain for your sales of such parts and components to the "STA 36" countries.

Second, if you expected that ECR would allow the sale of satellite items and former defense articles to countries at the other end of the spectrum—those subject to arms embargoes or controlled for anti-terrorist reasons—you will be disappointed. That is not the purpose of ECR.

Third, for trade with the rest of the world, licenses will generally be required but you will obtain the benefits and efficiencies associated with the Commerce licensing regime. Moving beyond the one-size-fits-all controls of the ITAR, you will be able to use the EAR for de minimis amounts of U.S. content incorporated into foreign produced end items without subjecting those items to U.S. export or reexport controls—that is, for sales to countries that are not subject to an arms embargo.

This should help you avoid having your satellite and defense-related items "designed out" of foreign products. It also helps safeguard the vitality of the U.S. defense industrial base. EAR licensing jurisdiction means no registration and licensing fees, manufacturing licensing agreements, technical assistance agreements, or temporary import authorizations.

Conclusion

The dialogue between the U.S. Government and industry is essential to our success in developing sound public policy that enhances U.S. national security. Thank you again for your interest and your support.